So what do Mt. Everest and retirement have in common? Quite a bit actually! If I were to ask you, "What is your goal when you climb a mountain?" your answer would most likely be, "To get to the top." But do you also want to get back down? Oh, yeah...getting down. That's the part that most people don't think about when they climb a mountain, yet it's the spot where 75% of the deaths occur.
The same is also true for retirement. Most people focus entirely on the accumulation phase, while ignoring the distribution phase. This is equally hazardous to most financial plans. The problem is that traditional financial planning doesn't take into account how to best distribute assets in retirement until it's too late! Advisors constantly tout rate of return, while ignoring rate of withdrawal.
Let me give you an example*. This assumes both individuals save the same amount of money and retire at the same age.
Person A goes the route of traditional financial planning. He gets great rate of returns, while losing in various years when the market is down. At the end of the day he averaged 8% (which by the way is what Warren Buffet averages on his stuff). He's happy and has accumulated $1,000,000! Life is good! Traditional financial planning says that you can withdraw 3% of your account value adjusted for inflation each year and hopefully not run out of money according to Monte Carlo curves. So after all of Person A's hard work, he gets a first year check of $30,000. Wow, that's sort of depressing, but he did well and probably is better off than others.
Person B goes the nontraditional route of financial planning. He gets moderate returns, but never loses money with a downturn in the market. At the end of the day he averaged 6%. He was only able to accumulate $700,000. He's quite happy because his money was safe from market losses the whole time and still acquired a bit of assets. His rate of withdrawal, however, is 5.5%. This amount is also guaranteed to last his entire life. He will never outlive his money. He will get $38,500 each year guaranteed.
So the question becomes, who is better off in the end? To conservative investors, Person B is better off. To risky investors, Person A is better off. Person A's income should increase by about 3-4 percent each year with inflation, at least that's what history says. He would start making about the same amount of money after 8 years, but wouldn't catch up in overall dollars withdrawn until year 17.
From my experience in the financial world, most people are more conservative. Many think they are risky investors, but they cringe when their accounts drop. So most people are likely to enjoy Person B's experience more than Person A. There's a lot to be said for a stress free financial life! If you would like more information on the Person B scenario, contact me here.
*Rates of return and income withdrawn in the above examples are for illustration purposes only and in no way constitute actual performance. Guarantees are determined by each company and dependent on product. Please request actual illustrations for current rates and product information.
No comments:
Post a Comment